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August 22, 2017 at 3:27 pm #402996elle
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Please help. Biogen is a biotechnology firm with a patent on a drug called Avonex, which has received FDA approval for use in treating multiple sclerosis (MS). Assume you are trying to value the patent and that you have the following estimates for use in the option pricing model:
? An internal analysis of the financial viability of the drug today, based on the potential market and the price that the firm can expect to charge for the drug, yields a present value of cash flows of $3.422 billion prior to considering the initial development cost.
? The initial cost of developing the drug for commercial use is estimated to be $2.875 billion, if the drug is introduced today.
? The firm has the patent on the drug for the next 17 years, and the current longterm Treasury bond rate is 6.7%.
? The average variance in firm value for publicly traded biotechnology firms is 0.224. We assume that the potential for excess returns exists only during the patent life, and that competition will eliminate excess returns beyond that period.
Thus, any delay in introducing the drug, once it becomes viable, will cost the firm one year of patentprotected returns. (For the initial analysis, the cost of delay will be 1 /17, next year it will be 1 /16, the year after 1 /15, and so on.) Based on these assumptions, we obtain the following inputs to the option pricing model.
Present value of cash flows from introducing the drug now = S = $3.422 billion
Initial cost of developing drug for commercial use (today) = K = $2.875 billion
Patent life = t = 17 years
Riskless rate = r = 6.7% (17year Treasury bond rate)
Variance in expected present values = ?2 = 0.224
Expected cost of delay = y = 1/17 = 5.89%These yield the following estimates for d and N(d):
d1 = 1.1362 (My answer is 2.1414. How is 1.1362 derived?)
N(d1) = 0.8720
d2 = ?0.8512
N(d2) = 0.2076I calculated the Black sholes with real option as following:
D1 = (ln?(S0/x)+(rd+ ?^2/2)(Tt)) / (??(Tt))
= (ln?(3.422/2.875)+(0.670.589+ [0.224^2/2])(17)) / (0.224?17)
= (0.1742 + 1.803496)/(0.224*4.123)
= 1.977696/0.923552
= 2.1414 Why is this wrong? How is the answer 1.1362 for d1 derived? 
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